During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

ECRI uses a highly nuanced “many-cycles” view to understand the complex dynamics of the global economy.

To monitor the U.S. economy alone, we use an array of more than a dozen specialized leading indexes in the context of the ECRI framework for incorporating various sectors and aspects of the economy.

The ECRI framework covers 21 economies, incorporating well over 100 proprietary indexes designed to be comparable across borders.

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Signaling Slowdown: The Little-Watched Commodities That Could

The latest oil price spike may turn out to be a head-fake, because the economy is already slowing. While the oil cartel can try to fix the supply of oil, it can’t really control the demand side, which is dominated by the economic cycle.

This is clear to us at ECRI because of our enduring focus on cyclical relationships and, in this case, sensitive industrial material prices, including oil. We’ve long maintained a daily price index of these commodities that moves in concert with cycles in industrial growth. About half of the price inputs we monitor are traded on various commodity exchanges, while the rest are priced from commodity producers.

For the past few quarters a very unusual gap has opened up between the two groups, with the prices of non-exchange-traded industrial commodities, which most observers don’t watch, falling, and in some cases plunging. This behavior is in sharp contrast to the bullish sentiment shown, until more recently, by the strength in the prices of commonly-watched exchange-traded commodities.

As the chart shows, because of their links to industrial growth, exchange-traded and non-exchange-traded commodity price inflation rates have historically moved very much in sync.

But the right-side of the chart shows exchange-traded commodity price inflation spiking up through early this year, driven by widely-watched industrial inputs like oil and copper, while non-exchange traded commodity inflation went straight down into negative territory, as the prices of raw materials like rubber and hides dropped precipitously. This is very unusual.

This undeniable weakness in the non-exchange traded commodity prices is in line with our March Bloomberg View Op-ed, The Global Economy’s Wile E. Coyote Moment, about the end of the 2016-17 synchronized global growth upturn. The current downturn in global industrial growth has caught many people off guard because they focus on exchange-traded commodities only. Doing so made it easier to think that demand wasn’t slowing because surging oil and primary metals prices had camouflaged what was really happening.

ECRI’s insight was that the rise in exchange-traded prices was not about demand, which we knew was slowing. Rather, it was about the confluence of a variety of supply shocks, which weren’t cyclical, and thus unsustainable.

Of course, Saudi Arabia and Russia had deliberately kept oil production in check to support oil prices. But also, aluminum and nickel prices had shot up on fears of U.S. sanctions on Russia. Copper prices had surged due to labor problems at major mines, and rule changes regarding Indonesian tin export permits had also caused supply shortages. Meanwhile, zinc prices were pushed up by the shutdown of major Australian, Irish and Canadian mines and China’s environmental clampdown, which had lifted lead prices. What’s more, those pollution controls also hurt the production of synthetic fabrics, which therefore couldn’t make up for the shortfall in Indian cotton exports caused by pink bollworms eating into the cotton supply. It really was this perfect storm of supply constraints – not the strength of global demand – that drove the earlier run-up in these exchange-traded commodity prices.

Stepping back, the real tip-off came from the earlier downturns in ECRI’s leading indexes of global industrial growth, which were then followed by the yawning gap between exchange-traded and non-exchange-traded commodity price inflation that opened up months ago. It’s only in recent weeks that exchange-traded commodity price inflation has turned down. It’s no coincidence that the Eurozone manufacturing PMI just dropped to a 1½-year low and its U.S. counterpart fell to a seven-month low.

Today, growth in the non-exchange-traded commodity prices remains negative, and growth in the exchange-traded commodity prices is closing the gap by dropping to an 11-month low. With the global industrial slowdown manifesting in all these very short-leading indicators, the market may soon start asking if global demand is all it’s cracked up to be.